The Big Split

It would be bad enough if the Republicans' tax plans were merely extravagantly regressive, rewarding the rich and leaving a big budget hole for everyone else to fill. But they appear just when the income gap has grown wider than it has been in more than a century. It's a double whammy. Al Gore correctly assails the Republican tax proposals, yet Gore and most Democrats have failed either to emphasize the larger regressive trends in American income and wealth or to propose the most direct remedy--a more progressive tax.

Neither Bush nor Gore talks about the biggest consequence of the 1990s boom: America's rich have become much, much richer. Bush doesn't mention it because his proposals would make things worse. Gore wants to claim the boom was good for everybody. But here are the unadorned facts.

First, income: The average income of the richest 1 percent of Americans--after they paid all federal income taxes, and adjusting for inflation--rose from $273,562 in 1986 to $517,713 in 1997 (the latest year for which IRS data are available). That's a gain of 89 percent. Over the same period, the average after-tax income of the bottom 90 percent of Americans went from $23,451 to $23,815. That's a gain of 1.6 percent--just $364. During the course of the decade, the share of the country's total family income claimed by the top 1 percent soared from 11 percent in 1990 to nearly 18 percent today.

Second, wealth: Although more Americans than ever own shares of stock, wealth accumulation has become even more skewed toward the top. The Dow Jones Industrial Average was at 3,300 when Bill Clinton entered the White House; it's now hovering around 11,000. But almost 45 percent of that explosive growth went to the wealthiest 1 percent; 85 percent of it went to the wealthiest 10 percent. In fact, the typical American family actually took on more debt in the 1990s than it did gains from the appreciation of its stocks. According to the Economic Policy Institute's annual report, "The State of Working America 2000/2001," the net worth of the typical household rose about $2,200--from $58,800 in 1989 to $61,000 in 1998. While this household's stock assets went up by $5,500 and nonstock assets (mostly the value of its home) up by $8,500, its debt rose by $11,800.

It's true, as conservative commentators insist, that measures of inequality are mere snapshots at one point in time and fail to account for income mobility. Yet the reality is that most people who start out near the bottom end up there (roughly six out of 10 children from families in the bottom fifth in the early 1970s were still there 10 years later). And yes, beginning in 1996, the real incomes of workers at the bottom stopped declining and began to rise. But this welcome reversal largely reflects an unusually low rate of unemployment--which allows bottom-rung workers to find one or more jobs and work longer hours. It seems doubtful that the business cycle has been permanently repealed. And this small uptick in wages at the bottom is no match for the giant leap at the top, resulting in greater inequality.

The failure of Gore and other Democrats to address the larger picture subverts their argument against Bush's tax plan because their argument doesn't respond to the core claim Republicans are making. "It's your money" is the Republican battle cry against taxes--repeated often enough that even many blue-collar workers who are earning squat and paying more in payroll taxes than income taxes are convinced that Republicans' proposed tax cuts are justified.

"It's your money" calls into question the whole legitimacy of taxes. If the government is running a surplus, and if the money it collects is yours to begin with, then it follows that the government ought to return the money it's not using. That the rich will get more of what's returned than anyone else is understandable if the rich contributed more than anyone else. In 1997, according to IRS data, taxpayers with incomes of $100,000 or more, comprising about 6 percent of all taxpayers, contributed almost 54 percent of all the income taxes collected that year. So of course any tax cut will give more back to them. What's unfair about that?

Just this: That same 6 percent of taxpayers with incomes of $100,000 or more made 34.5 percent of all the money earned in 1997, a larger proportion than in years past. It's this underlying shift of income and wealth toward the top that threatens the nation's social cohesion, its moral authority, and its citizens' sense that the burdens and benefits of economic change are being apportioned appropriately. A truly progressive tax on income and on wealth is justifiable under these circumstances because, as even Adam Smith understood, it would better equalize the sacrifices required to achieve important public ends, such as providing a good public education or reducing the public debt.

Equal sacrifice is the operative principle. As income and wealth continue to accumulate at the top, the fairest way to equalize the sacrifices needed to accomplish what we must do as a nation is to require the top to part with a greater portion of its accumulation than anyone else. This is the argument Gore and other Democrats must make in order to trump "it's your money." They need to talk about the big split in our society--to argue not just against the Republicans' regressive lurch but in favor of a more progressive tax system and a more equal America. ¤

About the Author

Robert B. Reich, a co-founder of The American Prospect, is a Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. His website can be found here and his blog can be found here.